Hello - I have just started studying, and I am having trouble with a question from the CFAI Example. This is in book 2, page 91. The first question asks which company reports higher expenses. OPIS uses an operating lease. So, my understanding is that the expense is 28,679 EUR per year for 4 years. CAPBS is capitalizing the lease. Thus, in the first year, the depreciation expense is 25,000 EUR, and the interest expense is 0 EUR. I thought that the company that reports the higher expense in year 1 should be OPIS since 28,679 > 25,000. However the book says CAPBS reports higher expenses in years one and two. Can someone explain why this is the case. Thank you very much.
A capital lease should have an interest expense since it is the same thing as using debt.
I agree with Qcubed. If you add the interest expense to the depreciation expense, CAPS will report a higher expense in the initial period.